BLBG: Treasuries Post First Weekly Loss Since October Amid Note Sales
Treasuries posted their first weekly loss in almost two months as the U.S. sold record amounts of two- and five-year notes during a holiday week marked by lighter trading than usual.
Government debt also slid after seven weeks of price gains pushed yields to historic lows. Measures of risk in the financial system moderated, with the gap between what the government and banks pay for three-month loans narrowing for a fourth week.
“The Treasury market is way, way overextended in terms of a fear trade,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 17 primary dealers that trade with the Federal Reserve. “No new shoes have dropped. Supply is an issue and will be an issue.”
The yield on the two-year note fell two basis points, or 0.02 percentage point, to 0.89 percent at 4:11 p.m. in New York, according to BGCantor Market Data. It touched 0.6044 percent on Dec. 17, the lowest since regular sales of the security began in 1975. The price of the 0.875 percent note due in December 2010 rose 1/32, or 31 cents per $1,000 face amount, to 99 31/32.
The two-year note’s yield climbed 15 basis points this week, the biggest increase since June and the first jump since the five days ended Oct. 31.
Other Treasuries’ yields also held near record lows after industry reports showed consumer spending fell during the holiday season, adding to concern the economic slump will lead to deflation. The 30-year bond yield dropped two basis points to 2.61 percent. For the week, it gained six basis points. The yield touched 2.5090 percent on Dec. 18, the lowest since regular sales began in 1977.
Note Auctions
The difference, or spread, between two- and 10-year note yields was 1.25 percentage points, the lowest since June 24. The gap was 2.62 percentage points on Nov. 13.
Rates on one-month and three-month Treasury bills fell below zero as investors sacrificed interest-rate payments to protect their principal. Rates on one-month bills were minus 0.05 percent, and three-month rates were minus 0.01 percent.
The Treasury auctioned a record $66 billion in two- and five-year debt this week. It sold $28 billion of five-year securities on Dec. 23 and $38 billion of two-year notes the previous day, both at the lowest yields ever.
The TED spread, the difference between the three-month London interbank offered rate and three-month U.S. bill rates, fell one basis point on the week to 1.48 percentage points, down from a record high of 4.64 percentage points Oct. 10.
Trading Volume
Less than $13 billion in Treasuries changed hands as of 2:04 p.m. today, according to ICAP Plc, the world’s largest inter-dealer broker. That compares with the 10-day moving average of $134.8 billion, and with a full-day volume of $124.5 billion on Dec. 26, 2007.
Discounts by retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Including fuel, sales tumbled as much as 8 percent. One of the Fed’s preferred gauges showed inflation at the lowest level since 2004.
“It’s safe to assume there’s no great shockers in any of the negative data,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, another primary dealer. “It’s bullish for Treasuries.”
The SpendingPulse data service calculates its sales estimates based on MasterCard Inc. network transactions and adjusts for cash, checks and other payment forms. Purchase, N.Y.-based MasterCard is the world’s second-biggest credit-card company.
Most Since 1969
The figures follow forecasts of falling sales from other industry groups. Sales at stores open at least a year may drop as much as 2 percent in November and December, the International Council of Shopping Centers said on Dec. 23, the most since the New York-based organization started tracking the data in 1969.
“I’m a bull on U.S. bonds,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $41.9 billion in assets. “Income data is a main factor and also consumer spending.”
The 10-year note’s yield may decrease to 1.7 percent by March 31, Nakamura said.
The core PCE index, a gauge of prices tied to consumer spending behavior, fell in November to 1.9 percent per year, a Commerce Department report showed on Dec. 24. That was the lowest since March 2004.
U.S. government debt returned 14.3 percent in 2008, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index of stocks fell 41 percent, the worst year since 1931.
The number of first-time claims filed for unemployment insurance in the third week of December rose to a 26-year high, indicating employers are stepping up job cuts as the recession deepens. Claims increased more than forecast to 586,000, the most since November 1982, from a revised 556,000 the prior week, the Labor Department said Dec. 24. The four-week moving average, a less volatile measure, also was the highest since 1982.
